Rates — What a 5% 10-Year Costs: Yardeni’s Multiple, the Fed’s Dots and the AI Trade

The Federal Reserve decides at 18:00 UTC today with the 10-year Treasury yield at 4.996% — its highest close since October 2023, after touching 5.00% on Monday and printing 5.008% on Tuesday morning. The 30-year is 5.36%, the 5-year 4.83%, the three-month bill 3.96%. A quarter-point hike is priced at roughly four in five and the market has stopped arguing about it. What it is arguing about is the number after the hike, and the clearest way to read that argument is the way Ed Yardeni read it on Tuesday: the 2-year Treasury yield sits about 100 basis points above the federal funds rate, the widest gap since 2022. A 2-year that far above the policy rate is the bond market saying it expects the policy rate to rise toward it. That is a sequence, priced. Today’s quarter point is the first step of it or the whole of it, and the material that decides which is not the statement or the press conference but the dot plot at 18:00 and the 2-year’s move in the minute after.

This Pulse is about what a 5% 10-year costs. Not whether the AI build-out gets built — that argument ran all summer and the weekend’s pacing news reopened it in a different form — but what a dollar of 2027 earnings is worth when the risk-free rate is five instead of four and a third. Yardeni put a number on it. We put ours beside it, and then we run it through the two halves of the AI trade and the three levels this diary has carried since August.

The arithmetic: a multiple, not an earnings story

Yardeni’s ‘Proceed with Caution’ on Tuesday cut his year-end S&P 500 target from 8,400 to 7,900 and moved 8,400 out to mid-2027. The earnings did not move: $425 a share for 2027, against $419.53 from the industry analysts, which he expects to rise to meet him by year-end. What moved was the forward multiple, from 19.8 to 18.6, ‘given the recent backup in bond yields’. His range for the year — 7,225 to 8,500, which is $425 at 17 and at 20 times — is unchanged, and 7,900 is 18.6 times, comfortably inside it. He lowered the odds of his Roaring 2020s base case from 80% to 70%, raised a bearish outcome over the next three to six months to 30%, kept 10,000 for the end of the decade and no recession through it. And he moved, in his own words, from ‘we will worry about a debt crisis when the bond market worries about one’ to ‘we are starting to worry now’, on a 10-year he sees on the verge of breaking out above 5.00%.

The shape of the cut is the point. A bull who touches the multiple and not the earnings is marking his book to the bond market, and the arithmetic is simple enough to do at the desk. With the S&P 500 near 7,600 on Tuesday’s close, 7,900 is about 4% above; 8,400 was about 10% above. The difference between those two — the six points of upside that went away — is the difference between 19.8 and 18.6 times the same earnings, and 1.2 turns of multiple is roughly what a 70-basis-point rise in the 10-year does to an equity risk premium that does not compress to offset it. Yardeni’s comfort is that the yield is still well below nominal GDP growth of 6.6% and that the surge in the 10-year TIPS yield in recent weeks reads as better growth rather than fear — the same reading this diary gave on Tuesday from breakevens that have not moved and a credit tape that has not widened. His worry is oil above $100, kept there in his account by the IRGC’s campaign against Gulf oil facilities ahead of the US midterms, because oil high for longer is what turns a hike into a cycle by keeping inflation from settling. We keep 7,900 as an outside marker beside our own lines; we do not move a line because a target moved.